Home | Comment & Analysis    Saturday 12 May 2018

Fuel Subsidies’ Removal: An economic necessity or political dilemma?

By Golda Abbe

After much speculation spanning years, the government of South Sudan finally announced the total lifting of fuel subsidies. This follows an ailing economy on the back of gross mismanagement, lack of hard currency, a civil war and increased US sanctions. The government have run out of strategic reserves at the limited fuel storages available.

In the 2017/2018 budget, Nilepet’s overspending of allocations was deemed a primary risk and recommendation was made to restrict the fuel price support to balance the national budget.

Officially fuel will increase from 22SSP /litre to currently trading at estimated 280/300SSP/litre.

Planning for the subsidy removal has been ongoing. Since the start of 2018, the open market has been operational. Ordinary folks have been purchasing from the pump at $1/litre, drastically reducing queues. The official rate was reserved only for government establishments, public transportation, and water tankers.

Those who benefitted most from the fuel subsidies were those who consumed most, who happens to be the better off, with private vehicles and generators. The poor were disproportionally disadvantaged, although basic needs such as water are universal.

Expect cyclical inflation to increase as the rising costs are factored in prices. Higher transportation costs will result in higher food and non-food items. Businesses will be affected.

The fuel subsidy has been very popular but costly. It’s distribution through the national oil company Nilepet, now under US sanctions, have given the company a bad reputation, including blamed, a conduit for government illicit trades. It never imported enough to meet demand, the gap met by private distributors selling at the dollar mark.

The subsidy costs the country an estimated $183million as per the 2017/2018 budget estimates. This does not take into account market and other distortions. Although the subsidies are to protect consumers from high and volatile prices, the costs of the subsidy were unsustainable.

Keeping the domestic price of fuel artificially low didn’t encourage investment in the sector either, as it made it a challenge to recoup the investments.

The lawmakers of South Sudan had rejected lifting the fuel subsidy. The government went ahead anyway. Governments are often reluctant to pass on the full cost of rising fuel prices to citizens, as higher fuel prices negatively impact people’s real income, consumption and the country’s economic production.

It will be a political dilemma in the short run unless the government can show the funds are redirected to other worthy causes and done in a structural and transparent manner.

It is not clear if the government will be implementing post-subsidy programs in the form of social safety nets. However, the government’s communique explains the subsidy funds are to be redirected to civil servant salaries. Whether the people believe it is a credible plan, is a different matter.

Deregulation to allow private distributors to import to their full capacity without government’s restriction in the form of import approval would go a long way. It will also reduce hoarding, smuggling and diversion substantially and stabilise the price at the actual product price. Allow the free market forces to determine the price, as well as review fuel taxes and customs costs.

It is widely acknowledged that subsidies encourage overconsumption and inefficient resource allocation, it is hoped subsidy reforms will bring structural changes at all economic levels. The logic goes fuel subsidy incentivises more consumption of the product, and this higher consumption increases the cost of the subsidy.

$1= 300 SSP

G. T. Abbe writing for Ghidam Advocacy.